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Inventing a Student Loan Crisis

College students have lots of “crises” — tough classes, relationship break-ups, homesickness, beer shortages — most of which are fleeting and, frankly, fatuous. One college crisis, however, never seems to end, and while parts of it may be overblown, Congress appears determined to keep pushing it along.

The seemingly eternal crisis is the ever-escalating price of higher education, and now students and parents fear the disaster will be made even worse by the nationwide credit crunch, which could shrink the amount of money available for student loans as companies and investors get out of the lending business.

“ Taxpayers bear the biggest burden of these expenditures, and reap little to none of the educational rewards. ”

Last Thursday, the House of Representatives passed legislation that would add more fuel to the fire, approving the Ensuring Continued Access to Student Loans Act. Only a week earlier, Rep. George Miller (D-CA), the chairman of the House Education and Labor Committee, and ranking member Rep. Howard “Buck” McKeon (R-CA) introduced the bill, which would put taxpayers on the hook to finance increased student aid no matter what happens with lending companies. Senator Teddy Kennedy (D-MA) is pushing similar legislation in the Senate.

Yet according to a statement released by none other than Miller himself, no students have actually reported an inability to get federal loans. And while several large firms, including HSBC and CIT Group, have recently stopped originating federal loans, J.P. Morgan Chase and other companies reportedly plan to expand their student lending operations. So while a shortfall in federal loan funding is possible, it’s far from a clear and present danger.

Whether or not the credit crunch causes a student loan shortage, the House bill would increase yearly limits on unsubsidized federal loans by $2,000 per borrower; allow parents holding federally guaranteed, low-interest PLUS loans to defer payment for six months after their children graduate; and change eligibility rules so that parents who’ve been delinquent on mortgage payments for up to 180 days can qualify for PLUS.

As bad as these provisions are for the taxpayers who’ll have to finance them, the parts that kick in if lenders do fall short on funds are even worse. The House legislation makes clear, for instance, that if guaranty agencies operating as “lenders of last resort” can’t generate sufficient funds to finance loans themselves, the Secretary of Education can advance them federal dollars. In addition, the Secretary would be authorized to purchase loans from lenders in the federal guaranteed loan program, a power that would supposedly only apply if the purchases wouldn’t “result in any cost to the Federal Government,” but how that would be determined is unclear.

The stated intention of Miller’s legislation is to protect student loans from the nation’s mortgage-centered credit squeeze. Ultimately, though, this is just another episode in our vicious, never-ending tuition-inflation cycle, which is driven by the attitude that everyone should be able to go to college wherever and whenever they want, even when others are unwilling or unable to help them pay for it. Indeed, it’s the vicious cost-escalation cycle that has made loans increasingly important: students and parents complain that higher education is too expensive, vote-seeking politicians increase grant and loan aid, colleges raise tuition to gather the new money, students and parents complain again, and around we go.

Taxpayers bear the biggest burden of these expenditures, and reap little to none of the educational rewards. Over the last ten years, students’ real, after-aid educational costs — tuition, fees, room and board — increased approximately 24 percent at private four-year colleges, and 35 percent at public institutions. Federal aid furnished by taxpayers, meanwhile, increased much faster, rising 77 percent in the last decade, from $48.7 billion to $86.3 billion.

In light of all this, the funny thing about the as-yet nonexistent student loan crisis is that taxpayers should actually hope it materializes. The only way to slow the vicious tuition-inflation cycle is to cut down on the cheap aid that fuels it, and since politicians are going to act as if there’s a crisis no matter what, we might as well benefit from some of the market discipline a real crisis could bring.